UK Economy Slides Backwards in Last Quarter of 2010

January 27th, 2011

According to the United Kingdom’s Office for National Statistics, the British economy contracted by 0.5 percent in Q4 of 2010. The ONS data came as a deep shock to the British economic and political establishment.Expectations were that the UK economy would continue a pattern of weak growth during the last threemonths of last year. By any stretch of the imagination, this is not good economic news.

The UK’s prime minister, David Cameron, already has his spin-masters working overtime. The official explanation is that “the weather” caused the contraction in Q4. However, even if the weather is taken out of the picture and the ONS data adjusted accordingly, the Q4 result would still show no growth. Undoubtedly, the UK coalition government is hoping that the ONS will eventually “revise” the Q4 number upwards. However, no matter how the politicians spin the news, the UK economic crisis remains intractable.

What is especially distressing about the ONS number is that the draconian spending cuts that have been formulated by Cameron’s government had not yet kicked in during the period in which Q4 economic statistics were being tabulated. With the British economy seemingly on the verge of a double-dip recession, the sharp cuts in public spending will prove to be a powerful pro-cyclical policy measure. The likely result is a renewed recession, resulting in a drop in tax receipts for the British government, ultimately defeating the stated purpose of the sharp fiscal cuts. In essence, the UK economy is caught in a dangerous fiscal trap, which the most recent ONS data for Q4 clearly illuminates in all its dark reality.